Wilbur Ross: Investing in Times of Distress and IRE

Wilbur Ross: The credit and sovereign debt crises of the past few years continue to profoundly reshape the financial landscape across the developed world. One of the most visible consequences from this difficult era has been the incessant restructuring of major European financial institutions. With low investor risk tolerance, capital-starved governments, and European banks facing the twin headwinds of ongoing economic weakness and more stringent regulation and capitalization requirements, compelling opportunities for well-positioned private equity (PE) investors look likely to remain abundant.

In July 2011, a group of investors, led by turnaround specialist WL Ross & Co., recognized this opportunity and announced they would purchase roughly 35% of Ireland’s largest bank, the Bank of Ireland (BOI). The price tag for the transaction was $1.45 billion (€1.1 billion), representing a post-money valuation of roughly 0.33 x price divided by the tangible book value (TBV — which equals a corporation’s total book value minus the value of intangible assets, including brand value, intellectual property, patents, goodwill and the like). Over a year later, BOI traded at roughly 0.50 x price divided by TBV, generating a 30% annualized return. Below are some of the critical lessons PE investors might consider in their ongoing survey of distressed banking opportunities across the continent.

Background

In the wake of the 2008 global financial crisis, Ireland experienced a near collapse of its financial system, largely driven by a rapid, fundamental deterioration in the country’s largest banking institutions. The situation became increasingly dire following the country’s 2008 decision to guarantee all bank deposits andnearly all liabilities (including forms of unsecured, subordinated debt). In the years following the Irish government’s guarantees, the inextricable relationship between the sovereign and its main banks only intensified.